But Don't They Know GDP Was Better Than Expected?

I think even the bailout beneficiaries on Wall Street know this is all smoke and mirrors! The selling is accelerating!

Grains Continue Downtrend

Frequently, on Fridays, grains will sell off. Traders don't want to hold positions over the weekend with the possibility that weather may change and impact prices adversely.

Note on Risk Strategy

from Mish Shedlock:

"In my world, the way to produce above average returns over time is to take some chips off the table when risk is high, and put them back on the table when there is a good risk-return opportunity."

Bail Out Early

One of the advantages of bailing early from a bad trade is that you then have cash reserves when the market presents a new opportunity. If you stick with a bad trade, then you can't take advantage of a good trade when it presents itself because your cash is all tied up!

But Stocks Sell Off Instead

GDP Grows Robust 5.7% in Q4

But could it grow without the government borrowing 25% of GDP? And how will we pay the bill?

Further, the large increase in debt will result in significantly high interest payments on what is owed, the CBO projections show. 

“With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket,” said the CBO.

“The government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms, from $207 billion to $723 billion, and will more than double as a share of GDP, from 1.4 percent to 3.2 percent,” reads the report. 

The CBO also noted that the deficit in 2009 “was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest.”

Greek Tragedy

EU Greek Bond Crisis

Using a Bad Trade to Our Benefit

from Dr. Brett-

Let's say I think stocks will break to the upside and I take a long position. The market goes my way initially, but then reverses. What looks like a valid breakout now shows itself to be a false breakout. I stop out of the position and take a modest loss.

That is good trading.

One trader I recently talked with took exactly those actions--and one more. He saw that the breakout was false, stopped out of his position, and took a modest loss. But he had mentally rehearsed what he would do under just such a scenario. He had told himself that if this long trade didn't work out, the market could retrace the entire prior day's range.

So he stopped out, took his loss, and flipped his position to be short.

He made money on the day.

That is great trading.

The losing trade set him up for a winning day, and all because he was prepared to act on opportunity, not just prepared to limit risk.

More:

Learning From Good, Losing Trades

Goldman Favored in Bailouts

Jan. 28 (Bloomberg) -- Goldman Sachs Group Inc., one of the biggest recipients of funds from the U.S. bailout of American International Group Inc., was seen by the public as favored by regulators, according to an internal Federal Reserve Bank of New York e-mail.
The public perception was a reason to reject a December 2008 media request for the names of securities purchased from banks during AIG’s rescue, according to the e-mail released yesterday. If the names of the assets were released, the banks, including Goldman Sachs, would be identified as beneficiaries, New York Fed employee Danielle Vicente wrote in the Dec. 4, 2008, e-mail to Fed counsel James Hennessy.
The New York Fed has said that releasing the names of banks that were paid to tear up $62.1 billion in AIG guarantees could hurt the insurer and its counterparties. The internal e-mail, obtained this month by a House oversight committee, indicates Vicente was also concerned that the AIG rescue would be viewed unfavorably if it was known that Goldman Sachs and non-U.S. banks received funds.
“A major U.S. counterparty was Goldman, which has already been seen as favored by the Fed/Treasury in the public’s eye,” Vicente wrote. Regarding the non-U.S. banks, “it would be hard to sell the public on U.S. funds to buy foreign entities out of AIG risk.”

Stocks Take Beating on Tech, Jobless Data

First time claims data was surprisingly high this morning. The 4-week MA is higher 3 weeks in a row!

from Fox Business:
Job hunters aren’t likely to find much to be excited about in the latest report on weekly unemployment claims, which came in worse than expected.
The Labor Department said Thursday that initial claims in the week ending Jan. 23 dropped 8,000 to 470,000, while Wall Street was looking for a pullback of closer to 32,000.
Claims in the previous week were revised to show an increase of 34,000, versus the previously reported 36,000.
The number of people getting state jobless benefits fell by 57,000 to 4.

A new wave of selling slammed the markets on Thursday, pushing the Dow down more than 100 points and dragging the Nasdaq Composite almost 2% lower, as the markets react negatively to tumbling tech stocks, the latest earnings reports and disappointing jobs data.

Bloomberg:

Jan. 28 (Bloomberg) -- Orders for capital goods rose in December, and more Americans than anticipated filed claims for unemployment benefits last week, indicating business investment is making a comeback while the job market stagnates.
Bookings for durable goods excluding transportation equipment climbed 0.9 percent last month, exceeding the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Initial jobless applications fell to 470,000 in the week ended Jan. 23 from 478,000 the prior week, the Labor Department said.
“It’s encouraging, but we haven’t put all the pieces together for a robust recovery,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. The figures are “consistent with a moderate rate of investment spending, but we still have a very weak labor market. We will make slow, steady progress in the months ahead.”
Companies such as Intel Corp. will probably keep churning out more goods to stop inventories from falling further, pointing to gains in investment that Federal Reserve policy makers yesterday said were contributing to the economic recovery. The Fed also said that while consumer spending is expanding, it is in part “constrained by a weak labor market,” underscoring the need to maintain low interest rates.
Stocks fell, led by technology shares, after Qualcomm Inc. lowered its sales outlook because of a “subdued” economic recovery in developed regions, including Europe and Japan. The Standard & Poor’s 500 Index dropped 1.1 percent to 1,085.95 at 11:11 a.m. in New York.

The Ugly Truth Behind Friday's GDP -- Gross Domestic Pain

from Minyanville:

On Friday, the Bureau of Economic Analysis will release its first estimate of Gross Domestic Product (GDP) for the fourth quarter of 2009. It’s widely expected that the number will be a positive 4% to 5%. That will be the second consecutive quarter of positive GDP growth, which “officially” means that the recession is over.

The talking heads will greet this number with great enthusiasm. They will interview members of the administration, which will greet the number with even greater enthusiasm proclaiming that a long period of steady economic growth is right ahead of us, all of which is due to its economic policies and actions.

Yeah, right.

In advance of this stellar achievement, I thought it might be useful to look at how the two most important economic indicators, GDP and the unemployment rate, are calculated. I have to admit I forgot the definition of Gross Domestic Product (GDP) from my undergraduate economics class, so if you also forgot, or skipped class that day, here it is:

GDP = C + I + G + (X-M)

C = Private consumer consumption, basically all the goods and services you buy

I = Investment, which includes business investment of plant, equipment, inventory, structures, etc. It doesn’t include investment in financial assets (your day trade that you accidentally held overnight does not contribute to GDP).

G = Government spending, all salaries, military, and investment, but no transfer payments, such as social security or unemployment benefits.

X = Exports

M = Imports

You might have noticed that there’s no consideration of debt, either personal or government, in the calculation of GDP. So, if the government spends like crazy (which it is), that spending will boost GDP.

China’s fourth quarter GDP came in at 10.7% -- to pull that off you need to do stimulus right. There’s no better example than this video. Every brick in that empty city is pure GDP. That stimulus makes our Cash for Clunkers and road repaving look pretty trivial.

With stimulus in mind, let’s look at our third-quarter 2009 GDP numbers.

GDP increased 2.2%, but most of that increase, 1.45%, was due to increased automotive purchases, obviously due to the Cash for Clunkers program. So a “G” program drove an increase in “C” without a subtraction of the increased national debt that was created by Cash for Clunkers. For actual numbers, click here.

Table 3 shows the actual numbers in billions of dollars. The quarterly numbers are seasonally at annual rates and the headline reported numbers are from the chained 2005 dollar column, which adjusts them for inflation. Look at two lines (shown here) in the Personal Goods section, motor vehicles and recreational goods and vehicles (SUVs fall into this category).


Click to enlarge

In the second quarter, total sales in these two categories fell $9.7 billion from the first quarter. In the third quarter, they increased by $45.4 billion from the second quarter. Because that's an annualized rate, the clunker program generated an additional $11 billion in sales at a cost of $3 billion. Whether or not you believe it was a good program, it did work and produced a pretty good multiple on the cost.

Total GDP increased $71.5 billion in the third quarter, but Personal Consumption only increased $63.6. Subtracting Clunkers leaves only $18.2 billion. Scanning all the other goods and services categories shows, on average, small gains and losses, the biggest of which was food at $6.6 billion -- not exactly an area where consumers enjoy spending more money. Overall, I'd hardly call it the start of the end of the recession for consumers.

The problem with GDP is that it doesn’t represent what the average American family is feeling. Much closer to consumer sentiment is the unemployment rate. You might think that the GDP calculation -- trying to get all spending and investment from all sectors -- would be difficult, but in reality, GDP has three months to get the final revision in, while the unemployment rate has little more than two weeks to be guessed at.The biggest guess part of the unemployment rate is called the birth/death model. The concept is that the Bureau of Labor Statistics (BLS) can't possibly contact all the small businesses that are starting, closing, hiring, or firing during the one-week period that the unemployment rate is measured. The birth/death model tries to account for these unmeasured jobs by guessing each month the number of jobs created or lost in several sectors of the economy. For the birth/death model, click here.


Click to enlarge

As you can see, the birth/death model created jobs every month in 2009 except January. During that time frame, the unemployment rate went from 7.4% at the end of 2008 to 10.0% at the end of 2009. If you find that small businesses managed to create net jobs all those months hard to believe, welcome to the club.

Despite the birth/death model, deciding who's working and who isn't is very complicated for the BLS. The “headline” unemployment rate (currently 10.0%) is calculated as follows: The number of unemployed divided by the labor pool.

That looks simple enough, but there's a lot going on under the surface. If you get laid off from a middle-management job and are working 20 hours a week at a fast-food joint to make ends meet, but you're still looking for a full-time job, you're fully employed according to the headline number.

There's one more item to discuss. If you're unemployed and give up looking for a job, you're now a “discouraged worker” and you're dropped from the labor pool. Here's a simple example to show the effect of discouraged workers.

Let’s say a small town has 100 people in the labor pool and 90 of them have jobs. The employment rate is 90/100, which is 90%, so the unemployment is 100%-90% = 10%. One of the unemployed workers gives up and stops looking for work. 90 are still working, but the labor pool is now 99 people. The employment rate is now 90/99 which is 90.9% which yields an unemployment rate of 100%-90.9 = 9.1%.

Amazing! If enough people stopped looking for work, we could get the unemployment rate way down and turn the economy right around! Mark Twain popularized the phrase : “There are three kinds of lies: lies, damned lies, and statistics.” I think Twain would have really liked the headline unemployment rate.

To be fair to the BLS, it does publish additional unemployment rates that can be found here.

The broadest group of underemployed workers (including discouraged and part-timers looking for full time) is reported by the BLS under the enlightening term, U6. U6 was 13.5% at the end of 2008, and ranged between 17.0% and 17.4% for the last four months of 2009. May I suggest a slightly more descriptive name for U6. How about Gross Domestic Pain? Isn’t this the real GDP that the average consumer is feeling?

GDP will rocket this Friday, but there was no improvement in the Pain Index in the fourth quarter. The combination of stimulus and inventory building will produce a good GDP number that will be unsustainable without progress in getting people back to work. With talk that Obama wants to cap discretionary spending, I don’t see how a new stimulus package can be seriously considered until the economy is in free fall again, and considering the deficit, an inability to finance a new stimulus package is a real possibility.

In sum, don’t get fooled by the strong GDP number on Friday. The real GDP, the Pain Index, will control the economy. I've raised cash, expecting to see a double-dip recession that I don’t believe the market has started to discount. I plan to trade SDS as a hedge to my long-term positions, but I emphasize trade. For example, I don’t expect to be hedged Friday morning before the GDP number, but I would expect a good fade opportunity soon after. That’s my plan and I’m sticking to it.

New Home Sales Plunge Also

from Marketwatch:

WASHINGTON (MarketWatch) -- Capping the worst year for housing since World War II, sales of new U.S. homes fell sharply in December for the second month in a row after a popular tax credit for buyers was set to expire, the Commerce Department estimated Wednesday.
New home sales fell to a seasonally adjusted annual rate of 342,000 in December after falling 9.3% in November to 370,000.
It was the lowest seasonally adjusted sales pace since March and just 4% above the all-time low of 329,000 reached last January.

Home Sales Plunge in December

from Fox Business:

Existing home sales plunged more than expected in December, according to a report from the National Association of Realtors, after the original deadline for the first-time home buyers' tax credit expired.
According to the NAR, first-time home sales fell by 16.7% in December to an annualized rate of 5.45 million units, a much steeper drop than the 5.9 million units economists had expected.
December's sales report is down from 6.54 million units reported in November but is still higher from the 4.74 million-unit sales level reported in 2008.

And It will get worse. A friend called me the other day to say that his neighbor just got his mortgage reset. His payment will increase from $970/month to $2700/month. More foreclosures coming! Also from Fox:

Like a carnival free-fall ride that stops suddenly, teasing riders into a false sense of safety before plummeting the rest of the way to the ground, some economists say the housing market could once again be headed for a plunge after slowly clawing back some of its 2008 losses.
A trio of gathering government storm clouds will be responsible for the drop that some predict could mean another 10% to 15% slump in prices, they say.
“Here it is three years after the peak and it’s still all about housing,” said David Rosenberg, an economist at Gluskin Sheff & Associates in Toronto. “The outlook for the market is extremely clouded.”
The first shoe to fall was last week’s Federal Housing Authority announcement that it would tighten its loan standards in light of defaults that had pushed the agency’s reserves well below its mandated level.
In an effort to stem the tide of defaults, the agency increased the required down payment for borrowers with the weakest credit, hiked the premium for its loan insurance required of all customers and restricted the amount of closing costs that may be contributed by the seller.
The FHA has backed more than 30% of loans in the past year as credit tightened and the market for borrowers with questionable credit dried up.
“For a lot of people the FHA was their only resort,” said economist Dean Baker, co-director of the Washington, D.C.-based Center for Economic Policy. “A lot of people who can’t get loans from the FHA will have nowhere else to turn.”
Up next is the Federal Reserve’s plan to close up shop on its planned $1.25 trillion purchase of mortgage backed securities begun last year. In that time, the government has purchased roughly three quarters of all mortgages that Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae have turned into securities.
The Fed’s planned March 31 pullout could send mortgage rates, which have been at historic lows in recent months helping to prop up home sales, up as much as a half to a full percentage point.
Economists point to the virtual halt in refinancing that occurred earlier this month as rates jumped 0.10 percentage point, helping push demand for refis to a six-month low, as an indication of what could happen.
“Barring a change of course form the fed you will see interest rates start to rise,” Baker said. “That should lead to increases in rates of 0.5 to 1%. It’ll be a gradual increase but that’s enough to have an impact on the market.”
The third and potentially most damaging blow poised to strike the housing market is the expiration of the federal tax credit for first time home buyers. The $8,000 credit for first time buyers - $6,500 for current homeowners in their houses longer than five years – has helped push sales up more than 15% from December 2008 but is set to expire on April 30.
The credit was originally scheduled to expire on November 30, 2009, and the market gave a preview of the potential impact last month when existing home sales dropped 16.7% - or more than one million units - from November.
“We’re likely to see a further falloff this spring because of the expiration of the credit,” Baker said.
Michael Lea, director of the new Corky McMillin Center for Real Estate at San Diego State University, said the actions by the government will likely mean a strong first quarter of real estate sales with the second half turning negative as rates rise and demand softens.
"The net of it is transaction volume will be more concentrated in the first half and weaken in the second, and house prices are likely to have downward pressure again," Lea said, adding that the already-depressed markets of Nevada, Michigan and Indiana will continue to be harder hit than others where the economic recovery may be taking hold more firmly.
There are other factors that will likely pressure the market as well, said Rosenberg. A glut of inventory – there are nearly nine million homes either on the market currently or vacant after foreclosure and being held off by the bank that owns it – means it will continue to be a buyer’s market.
“The lingering problem in the housing market is still one of excess supply,” he said. “The prospect we could have a 10-15% downfall in residential real estate values is significant.”
The further drop in value would decimate consumer confidence and lead to more foreclosures as fully one half of all mortgage holders in the U.S. would owe more than the value of their homes.
“That would put tremendous pressure on the government to deal with that environment,” he said.
High unemployment is yet another wild card that could pummel housing. As the jobless rate hovers near 10% and the rate of under-employment crests 17%, consumer confidence – and buying power – has been battered. With no clear end in sight to skyrocketing unemployment, the housing market and consumer spending in general are bound to suffer.
But unlike most sciences, economics is one of speculation and conjecture, so much so that President Harry S. Truman, tired of his economists’ penchant for hedging their forecasts with information from “the other hand,” once demanded a one handed economist.
Nothing has changed.
Celia Chen of Moody’s Economy.com said she expects the market to rebound in 2010, and she downplays the effect the government will have on the housing market. Indeed, while existing home sales were reported to have fallen by nearly 17% in December, median prices actually rose for the first time in more than two years.
The FHA restrictions should have little to no effect, Chen said, because few borrowers have credit scores as low as 580, the threshold at which the agency requires 10% down instead of its traditional 3.5%. It’s uncertain if the Fed will actually make good on its intent to pull out of the mortgage backed market, Chen says, and if the economy does not pick up that decision could be reversed.
The credit expiration may also have little effect, she said, because the bulk of the buyers eligible to take advantage of it have already done it.
“I think that our outlook is that the housing market will continue improving through this year and the government support that will be fading away will be fading away at the same time the economy is strengthening,” Chen said. “That will help drive demand for homes. If things work out well these policy measures will be in place long enough to get housing past the worst of it.”

Teleprompter Tirades!

The teleprompter tyrant can't even speak at an elementary school without his crutch!

Proposed Banking Reform Doesn't Fix the Real Problem

from Fox Business:

President Barack Obama announced moves to limit the size and risk-taking ability of the largest banks because of the risk they pose to US taxpayers. Adviser and former Federal Chairman Paul Volcker, no longer marginalized in the administration, backs the changes.

Banks will no longer be allowed to own or operate hedge funds or private equity funds, among other things.

Missing here: Giving Fannie Mae and Freddie Mac an unlimited, uncapped credit line into the US Treasury on Christmas eve.

This, at a time when both disclosed in securities filings that the housing policies of the Administration and Congress will lead to additional taxpayer losses. Both have combined balance sheets equal to about 40% of US GDP, and combined both received the biggest taxpayer bailouts.

Which company really needs to be shrunk to protect taxpayers?

You should worry that the bank fixes don’t target the real causes of the crisis, as the administration attempts to re-affix a regulatory antenna to the roof of the government that was knocked off long ago.

Bernanke Re-Appointment Reassures Markets

Despite the negative news on the jobs front, the markets seem reassured that a Bernanke reappointment seems more likely. Stock futures are up significantly. They should be traumatized rather than reassured. A Bernnake reappointment only guarantees more bubble-blowing, and bubbles popping! This is a sign that inordinate and irresponsible risk has returned as the order of the day. This spells -- and smells -- like more trouble brewing ahead! And this is precisely why a Bernanke reappointment is such a bad idea. It will lead to even greater pain when this latest bubble pops!

More Manufacturing Jobs Lost, Government Jobs Created

This is not a good sign! From Business Insider:

We've gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.

WalMart Signals the Return to Lay-Offs

from 24/7 Wall Street:
Three of America’s largest firm announced firings or signaled them during the last week. Wal-Mart (NYSE:WMT) cut the deepest, which is frightening because it is the most financially healthy company in the world. In a surprise announcement, the world’s largest retailer said it would cut 10% of its Sam’s Club division, which means nearly 12,000 workers will get axed. The news cannot be good for the staggering retail sector. Christmas was weak, but Wall St. assumed that Wal-Mart was doing as well as if not better than its smaller competitors. The Wal-Mart move will give other retail firms “permission” to take fresh looks at their staff levels without the stigma of announcing firings ahead of other large store chains.Xerox (NYSE:XRX) also unexpectedly said it would cut 2,500 people. It did so at the same time as it posted good earnings. That means Xerox believes that it can still wring more productivity from the people it will continue to use. The tech sector is still on a bumpy ride while consumers and IT managers try to decide if they can afford to upgrade to new equipment. The beginning of 2010 could cause a fresh round of reviews of how much blood can be squeezed from the employment pool stone. Large firms that made layoffs last year can now look at four quarters of what those layoffs have done to them or for them financially. If cuts worked once, they might work again.

WalMart Signals the New Round of Large Co. Lay-Offs

from 24/7 Wall Street:
Three of America’s largest firm announced firings or signaled them during the last week. Wal-Mart (NYSE:WMT) cut the deepest, which is frightening because it is the most financially healthy company in the world. In a surprise announcement, the world’s largest retailer said it would cut 10% of its Sam’s Club division, which means nearly 12,000 workers will get axed. The news cannot be good for the staggering retail sector. Christmas was weak, but Wall St. assumed that Wal-Mart was doing as well as if not better than its smaller competitors. The Wal-Mart move will give other retail firms “permission” to take fresh looks at their staff levels without the stigma of announcing firings ahead of other large store chains.Xerox (NYSE:XRX) also unexpectedly said it would cut 2,500 people. It did so at the same time as it posted good earnings. That means Xerox believes that it can still wring more productivity from the people it will continue to use. The tech sector is still on a bumpy ride while consumers and IT managers try to decide if they can afford to upgrade to new equipment. The beginning of 2010 could cause a fresh round of reviews of how much blood can be squeezed from the employment pool stone. Large firms that made layoffs last year can now look at four quarters of what those layoffs have done to them or for them financially. If cuts worked once, they might work again.
Oracle (ORCL) is close to closing its deal to buy Sun Micro. Sun’s remarkable history of large layoffs is an example of what happens to a company when its products lose most of their relevance and R&D efforts cannot bring the firm back into alignment with customers demands. Sun will now become one of the many divisions of Oracle and that almost certainly means that many management and sales people will be gone by the end of the quarter.
The early part of 2009 was marked by an unprecedented number of large cuts as America’s most well-known companies. In some weeks over 100,000 American were put out of work by “downsizings” at these firms. That process has slowed a year later, but there is a growing body of evidence that it is not going away.
The most critical difference between last year and this is that 10% of Americans, 17% by some measures, are without jobs. The economy has not started to add new jobs yet. Each person that a Wal-Mart, Xerox, or Oracle lets go now is put into jobless pool with a record low number of openings for each job seeker. That means there is no Dutch Boy at the dike to prevent the ongoing effects that unemployment has on housing, credit, and the government’s ability to improve income to the IRS.
The employment mess, a tragedy beyond description, is still going on.
Douglas A. McIntyre